Non-Compete Agreement

What Is a Non-Compete Agreement?

A non-compete agreement is a contract that prevents employees (and sometimes contractors) from competing in any way with an employer once they’re no longer working for the organization.

The prohibited actions may include:

• Getting another job
• Taking another contract
• Starting a business in the same field
• Working within a certain distance of a particular location
• Working with certain competitors

Note that a seller of a business may also sign this type of agreement with the purchaser.

Non-compete agreements are often designed to help businesses maintain their market share. This is because they prevent employees and contractors from revealing trade secrets to competitors or using their former employers’ business relationships and skills to gain an advantage over them.

What Is a Non-Compete Clause?

A non-compete clause has the same terms and serves the same purpose as a non-compete agreement. The only difference is that non-compete clauses usually appear as one section within a larger business sale or employment contract instead of being signed as a separate legal document solely for that purpose.

Common Elements of a Non-Compete Agreement

Non-compete agreements are customized for each individual business’s needs, but they often have a few features that apply to most clauses or contracts of this type:

• Competition: What type of businesses can be considered competitors?
• Scope: What specific type of work or practices is the former employee or business seller not allowed to engage in?
• Location: What are the exact geographic parameters in which the former employee or business seller must avoid competing?
• Duration: How long does the non-compete agreement last?
• Consequences: What happens if the employee or seller violates the agreement?

Including these elements gives business owners the best chance of enforcing the contract should they ever find themselves in court.

Industries That Typically Use Non-Compete Contracts

Non-compete contracts are generally used in industries and sectors where businesses have a lot at stake if an employee goes to work for a competitor.

Sales and Service-Based Businesses

Employees in these types of businesses typically have to increase their own clientele through marketing and building business relationships. It can truly hurt the business if an employee takes that clientele elsewhere or uses those relationships to start their own company.

Technology and Manufacturing Companies

These types of companies are the most likely to be working with new technologies and products that others may not know about or have access to yet. Non-compete clauses ensure product engineers and developers don’t take those ideas and trade secrets to a competitor and cause the business to lose out on potential market share.

Banking and Financial Institutions

Key employees in the financial industry often develop in-depth, specialized knowledge about a company’s financial dealings, including investing strategies and significant clients that the company works with.

Signing a non-compete agreement stops potential secrets from getting out to other institutions that might allow them to pull ahead in the market or strengthen their financial portfolio.

Healthcare

Doctors and nurse practitioners who must build up a patient base often sign non-compete agreements because they have the potential to take money away from a practice if they leave and have those patients follow them to a nearby facility.

Healthcare researchers also have these contracts so they won’t expose new discoveries or medical treatments to a competing lab or business.

Media and Creatives

Media personalities often gain followers. If a person leaves a show or network to take their talents elsewhere, viewership (and therefore sponsor deals) could decrease.

Additionally, those in creative professions like marketing may sign employment contracts with non-compete clauses to avoid sharing creative ideas and campaigns that could boost another company’s revenue or help them usurp the business’s place in the market.

The Benefits of Non-Compete Agreements

Though non-compete agreements are often thought of as favorable to employers, having one in place can have benefits for both parties:

• Protect the company from having sensitive information shared with competitors
• Incentivize employers to invest in employees’ professional development to keep them on the cutting edge of industry development and increase their engagement
• Encourage employers to trust employees with trade secrets and proprietary information
• Decrease employee turnover, leading to lower costs for the company and improved morale

With a non-compete agreement, employees can often enjoy longevity and trust while employers feel comfortable about the legal protection they have.

Drawbacks to Non-Compete Agreements

Non-compete agreements also have disadvantages for both businesses and employees:

• Businesses in the same sector may lose out on top talent.
• Employees may not know about a non-compete agreement as a condition of employment until after accepting an offer.
• Employees generally aren’t able to negotiate the terms of the agreement.
• Employees, including those without trade secrets, may have their career progression limited by not being able to work in their field for long periods.

With an understanding of both the benefits and drawbacks of using non-compete agreements, it’s important for companies to explore whether requiring one is the right move.

Are Non-Competes Enforceable?

There are no federal laws that govern whether non-compete agreements can be enforced in a court of law. Instead, those decisions are left up to each individual state. While non-compete agreements are legal and enforceable in many states, there are a few where they’re not recognized or state law has deemed them unenforceable.

State Laws

Some state laws completely prohibit non-compete agreements and clauses from being enforced in court, while others have restricted their enforcement to only certain industries or situations.

California

California Assembly Bill 1076 makes non-compete clauses unlawful and requires employers to notify all employees that their contracts or clauses are void. The state has previously made any restrictions on anyone’s ability to engage in a profession or trade, including in an employment context, unenforceable (with a few exceptions). This law applies to remote workers regardless of the state in which their contract was signed.

Colorado

HB22 declares that any restrictions on a person’s right to receive compensation in exchange for their labor are void, with a few exceptions. Employers also cannot ask the employee for reimbursement for job training or education.

Hawaii

H.R.S. 480-4 specifically prohibits non-compete agreements in regard to technology businesses. The law does not prohibit these agreements in other types of businesses.

Minnesota

In 2023, Minnesota introduced and passed SF 405. The law renders non-compete agreements unenforceable for employees and independent contractors.

North Dakota

North Dakota has a longstanding law declaring that non-compete agreements are not enforceable in court. Though court cases have tried to challenge this law, they’ve been unsuccessful.

Oklahoma

With a few exceptions, Oklahoma law permits former employees to engage in the same business as their former employer as long as they don’t try to solicit their customers. This law also declares that non-compete agreements are “void and unenforceable.”

Utah

Utah law does allow the enforcement of non-compete agreements, limited to a period of one year.

The Proposed FTC Non-Compete Ban

On January 5th, 2023, the Federal Trade Commission proposed a rule that would ban employers from requiring or entering into non-compete agreements with employees. The rule would supersede all state laws except those that afford employees an even greater level of protection.

This proposed rule would apply only to the employer-employee relationship and wouldn’t apply to those buying or selling a business entity. This is because it’s aimed at increasing the earning potential of employees impacted by non-compete agreements.

It wouldn’t prohibit non-solicitation, confidentiality, and concurrent employment restraints. It also wouldn’t apply to businesses that aren’t subject to the FTC Act, such as air carriers, banks, insurers, and nonprofits.

How the Non-Compete Ban Could Impact Existing Agreements

The FTC’s proposed non-compete ban would apply to current and former employees and render all non-compete contracts void. Additionally, employers would be required to notify all current and former employees that their contracts have been rescinded, provided they have up-to-date contact information for those former employees.